- Shifts in disclosure announced at Cop27 have made it easier for investors to price ESG risk and opportunity into valuations.
- Transition plans of South Africa, Indonesia and Vietnam will have to be funded by the private sector.
- Investors will have to focus on actual reductions rather than passing the buck.
Expectations were never especially high for the Cop27 climate talks in Sharm El Sheikh, Egypt, this year.
In the summer, Grace Fu, Singapore’s minister for sustainability and the environment, presciently told Capital Monitor that the momentum for climate action was not now as strong as it was last year, thanks to economic headwinds as well as the knock-on effect on energy supplies amid Russia’s invasion of Ukraine.
In the end, it appeared to be a slightly damp squib. “Whether true or not, Cop27, which set out to focus on all things implementation following the cacophony of pledges made by governments and companies in Glasgow last year, hasn’t helped all that much yet,” said James Peel, ESG portfolio manager at Titan Asset Management (AUM $6.5bn) in an email.
Speaking at a Fitch webinar on 21 November looking at the takeaways for fixed income investors from the climate talks, Craig Gosnell, senior director of ESG and sustainability at Sustainable Fitch in London, pointed out that “Glasgow was the finance Cop putting in the plumbing to accelerate the capital flows”.
Out of Glasgow had come the Task Force on Climate-Related Financial Disclosures (TCFD) disclosures, the International Sustainability Standards Board (ISSB) climate stress testing, science-based transition plans and frameworks to wind down stranded assets. “Finance was seen to be looking in the mirror at climate and not through a window,” Gosnell said.
The scope of Cop27 was much narrower.
For Trisha Taneja, global head of ESG capital markets and advisory at Deutsche Bank in London, there was one main takeaway. Speaking at a sustainable finance roundtable on 29 November, she pointed to efforts to harmonise ESG disclosure.
“As we get closer to a standardised disclosure regime, this allows investors actively to price ESG risk and opportunity into valuations. That’s one thing that we’ve missed in the market right now,” she said.
South Africa, Indonesia and Vietnam
While Cop27 produced none of the big headlines that were seen last year, this is not to say that there was no progress.
For William Attwell, associate director of Sustainable Fitch in London, speaking on the Fitch webinar, there was movement on the transition of three major economies. South Africa, Indonesia and Vietnam.
“They seem to have more flesh on them,” he said.
Transition in South Africa was, of course, announced at Cop26 in Glasgow last year.
“There have been a lot of negotiations behind the scenes between the South African government, developed countries and the EU. We are starting to see a bit more clarity as to what that’s actually going to involve,” he said.
Less than 5% of the pledged $8.5bn to help the economic transition is expected to come from grants. The heavily coal-dependent economy will see funding for renewables and other sources of clean energy come from sources such as concessional debt, loans and loan guarantees, he said.
As a typical example, he pointed to the $1.8bn funding announced at Cop27 from Britain to the African Development Bank to help unlock funding for projects in South Africa.
Indonesia, he said, was “probably further along in terms of negotiation” although there is “not much clarity in terms of firm commitments from different sources of financing”.
As for Vietnam, again, he said that the grant funding element of it is going to be very small with the remaining up to $14bn funds that have been promised to come from a variety of concessional and other sources of loans.
All three economies will need external capital.
It is not a favourable environment for emerging markets to be taking on additional debt, he said, pointing to the IMF warning that “a large proportion of emerging markets are already at or near levels of debt distress”.
It still needs to be made clear what portion of those financing packages are going to come from grants and what proportion is going to come from additional debt for the sovereign, or for sovereign-linked and other public entities that would be involved in retiring those assets.
Attention to ESG financial detail
What this means for investors, explained Aurelia Britsch, head of climate risk at Sustainable Fitch in Singapore, speaking on the webinar, is that they are still finding their way. “Investors are definitely trying to identify the business financial risks for investments arising from the transition,” she said.
She has identified an increase in investors trying to measure their carbon footprint and setting net zero targets in order to reduce risks in their returns or gain new clients. “There has been a widening disconnect between emission reduction in investors’ portfolios, and actual decarbonisation of the real economy,” she said.
Dutch asset management firm Robeco ($209bn AUM) has pointed out that 52% of the top emitters globally are misaligned with the goals of the Paris agreement.
Britsch raises a point that is often swept under the carpet that when investors divest their most carbon-intensive holdings, this does not result in a real-world emission reduction.
“That is what is needed to limit temperature rise and this gap could pose reputational or greenwashing risks for the investors that follow such strategies,” she warned.
The success of Cop27 may be more subtle than the headlines. It might be a shift in attitude.
What Britsch expects to see from investors is “a renewed focus on financing the reduction in emissions”.
It is precisely what Taneja highlighted – a greater attention to detail. Britsch calls it a “rising focus on the credibility of companies fundraising plans”. Investors will need to focus on the implementation of the commitments made by the companies they invest in and track their progress,” she said.
If that happens, then Cop27 will maybe not be the washout that many regard it to have been.